Question

Bradley-Link’s December 31, 2021, balance sheet included the following items: 

Long-Term Liabilities                             ($ in millions) 

9.6% convertible bonds, callable at 101 beginning in 2022, due 2025 (net of unamortized discount of $2) [note 8]........................................................................$198 

10.4% registered bonds callable at 104 beginning in 2031, due 2035 (net of unamortized discount of $1) [note 8]............................................................................49 

Shareholders’ Equity Equity—stock warrants........4 

Note 8: Bonds (in part) 

The 9.6% bonds were issued in 2008 at 97.5 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of the Company’s no par common stock. The 10.4% bonds were issued in 2012 at 102 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $25, beginning 2022. 

On January 3, 2022, when Bradley-Link’s common stock had a market price of $32 per share, Bradley-Link called the convertible bonds to force conversion. 90% were converted; the remainder were acquired at the call price. When the common stock price reached an all-time high of $37 in December of 2022, 40% of the warrants were exercised. 

 

Required: 

1. Prepare the journal entries that were recorded when each of the two bond issues was originally sold in 2005 and 2012. 

2. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022 and the retirement of the remainder. 

3. Assume Bradley-Link induced conversion by offering $150 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022. 

4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 45 shares for each bond rather than the 40 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022. 

5. Prepare the journal entry to record the exercise of the warrants in December 2022.

Answer 1

1.)

Date	Particulars	Debit ($)	Credit ($)
2008	Cash (97.5%*200000000)	195000000
	Discount on bonds payable (200000000-195000000)	5000000
	Convertible bonds payable		200000000
	(To record issuance of bonds)
2012	Cash (50000000 * 102%)	51000000
	Discount on bonds payable (50000000+4000000-51000000)	3000000
	Bonds payable		50000000
	Equity - Stock Warrants		4000000
	(To record issuance of bonds)
2.)
2022	Convertible Bonds payable (90% * 200000000)	180000000
Jan	Discount on bonds payable (10% * 180000000)		1800000
	Common stock ( 180000000-1800000)		178200000
	(To record conversion of bonds)
2022	Convertible Bonds payable (10% * 200000000)	20000000
	Loss on early extingishment of bonds (20200000+200000-20000000)	400000
	Discount on bonds payable (2000000 * 10%)		200000
	Cash		20200000
	(To record early retirement of bonds)
3.)
2022	Convertible Bonds payable (90% * 200000000)	180000000
Jan	Conversion expense (90% * 200000 bonds * $150)	27000000
	Discount on bonds payable (10% * 180000000)		1800000
	Common stock (180000000+27000000)-(1800000+27000000)		178200000
	Cash (90% * 200000 bonds * $150)		27000000
	(To record conversion of bonds)
4.)
2022	Convertible Bonds payable (90% * 200000000)	180000000
Jan	Conversion expense  (90% * 200000 bonds * (45-40)shares)* $32	28800000
	Discount on bonds payable (10% * 180000000)		1800000
	Common stock (180000000+28800000)-1800000		207000000
	(To record conversion of bonds)
2022	Cash ($25 * 40warrants * 50000 bonds * 40%)	20000000
Dec	Equity- stock warrants (40000000 * 40%)	1600000
	Common stock (20000000 + 1600000)		21600000
	(To record the exercise of warrants)

1.)

Date	Particulars	Debit ($)	Credit ($)
2008	Cash (97.5%*200000000)	195000000
	Discount on bonds payable (200000000-195000000)	5000000
	Convertible bonds payable		200000000